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msnbc.com
updated 6/28/2004 8:24:13 AM ET 2004-06-28T12:24:13

This Wednesday marks the mid-point of 2004, but for Wall Street the day will mean much more than a time to reflect on the six months gone by. With two important global events taking place this week, many market observers say it could also be a pivotal moment for the direction of the U.S. stock market.

Major Market Indices

Traders will hold their collective breath at 2:15 p.m. ET on Wednesday, June 30, as the Federal Reserve announces what is widely expected to be the first credit tightening in over four years. The Fed’s decision comes after the U.S. military transferred Iraqi sovereignty to an interim government early Monday, two days ahead of schedule.

The two events are seen as hugely significant for the U.S. economy, the volatile situation in the Middle East and, ultimately, the direction of stock prices. And uncertainty about these events has weighed on the stock market for the last two weeks.

In particular, investors have fretted about the implications of the Fed raising its benchmark overnight lending rate from its four-decade low of 1 percent at the conclusion of its two-day policy meeting this Wednesday. Equity trading volumes have dried up, reaching the same tepid levels usually associated with the mid-summer months.

“These have been the dullest two weeks in my 37 years in the business,” sighed Ned Riley, chief investment strategist at State Street Global Advisors. “There is a complete indifference on the part of buyers and sellers to do anything before June 30.”

Ned Riley thinks anyone looking for great fanfare on June 30 is likely to be disappointed. The stock market has already factored in a quarter-point rise in the Fed’s benchmark federal funds rate, and a few more successive interest-rate hikes on top of that, he said, and so Wednesday’s rate hike is likely to leave the market relatively unchanged.

A pet concern for investors of late is that the Fed will raise rates more aggressively than its own soothing rhetoric has suggested in a bid to counter inflation. But a cooling economy in the latter half of too 2004 should keep that that eventuality at bay, Riley notes. Higher rates can slow economic and earnings growth by raising the cost of capital for companies.

“The market has its hopes up June 30, but I think it will be anti-climactic,” Riley said. “The market has been boring for the last few weeks, but then again boring can be constructive because it implies that the underlying fundamentals for the stock market are still strong.”

Other market watchers like John Shin, U.S. economist at Lehman Brothers, think the relief of moving past the crucial Fed meeting and the power handover in Iraq may boost stocks. Shin said he thinks that if the Fed makes its expected quarter point rise in interest rates, and continues to soothe the market by saying it will continue to raise rates at a “measured pace,” it will be “a mild positive” for the stock market.

But with a rise in interest rates largely expected, most economists and traders will be focused on the wording of the Fed’s post-meeting policy statement said Steve Stanley, an economist at RBS Greenwich Capital.

“The key is whether the Fed will continue to say its future rate hike considerations will be measured,” Stanley said. “I think they will probably will, but introduce wording that gives them the flexibility to act more aggressively if there is a dramatic change in inflation.”

The prospect of a rise in U.S. interest rates could grab most of the attention on Wall Street this week, but investors will also be wading through a slew of economic data, including Friday’s June payrolls report, Tuesday’s consumer confidence survey and Thursday’s manufacturing index. And the Iraq handover this week will also garner attention, as markets hope for the best but fear the worst after a rise in attacks by insurgents seeking to disrupt the transition.

Stanley doesn’t think the handover will have anything but an indirect influence on stocks. “If we see mass casualties in the U.S. military that could impact consumer confidence,” he said. “And then there is the political prism: How Iraq plays out is pivotal for determining who wins the election, and the traditional view is Kerry is bad for stocks because he might undo some of the Bush tax cuts.”

Investors will also be sharply focused on this week's payrolls report for June, which is due for release early Friday and widely expected to show a gain of some 250,000 jobs in the month versus 248,000 in May. However, Steve Stanley doesn’t think the jobs data are as important to Wall Street as they were a few months ago.

“People are comfortable with the solid uptrend we’re seeing jobs, and so anything between 200,000 and 300,000 is the status quo and not likely to have much impact on the way the market perceives the Fed,” he said. “One thing in jobs report the market will pay attention to is the unemployment rate: it’s a measure of slack in the economy, and if it falls it may push forward expectations for the Fed’s future rate movements.”

Once the Fed makes its expected first rate cut this week, Wall Street’s main focus will shift from the government’s monthly jobs report to the monthly consumer price index, which measures inflation at the consumer level. “It will become the most important economic report because it will determine how fast the Fed moves on rates,” he said.

Wall Street closed Friday mixed, but more or less flat for the week. With the first half of the year almost over, the Dow Jones industrial average is down 0.8 percent year-to-date, while the Nasdaq Composite index is up 1 percent and the Standard & Poor’s 500-stock index is up 2 percent.

Reuters contributed to this story.

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